Anti-Dilution Provision

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Definition of 'Anti-Dilution Provision'

An anti-dilution provision is a clause in a stock purchase agreement that protects the original shareholders from dilution. Dilution occurs when new shares are issued, which decreases the value of each existing share. Anti-dilution provisions can be either "full" or "partial."

A full anti-dilution provision protects the original shareholders from any dilution, regardless of the reason for the new issuance of shares. A partial anti-dilution provision only protects the original shareholders from dilution that occurs as a result of certain events, such as a public offering or a merger.

Anti-dilution provisions are important because they protect the original shareholders from losing their investment value. For example, if a company issues new shares at a lower price than the original shares, the original shareholders would see their investment value decrease. An anti-dilution provision would prevent this from happening.

There are a few different types of anti-dilution provisions. The most common type is a "weighted average" anti-dilution provision. This provision calculates the number of new shares that are issued by taking the total number of new shares issued and multiplying it by a weighted average of the prices of the original shares. The weighted average is calculated by giving more weight to the shares that were issued at a higher price.

Another type of anti-dilution provision is a "ratchet" anti-dilution provision. This provision simply adjusts the conversion price of the original shares so that the original shareholders receive the same number of shares after the new issuance of shares.

Anti-dilution provisions can be complex, so it is important to consult with an attorney before entering into a stock purchase agreement that contains an anti-dilution provision.

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